PDF "A $1.5 Trillion Crisis: Protecting Student Borrowers and ...

Testimony of Persis SiChing Yu, National Consumer Law Center Before the U.S. House of Representatives Committee on Financial Services

regarding "A $1.5 Trillion Crisis: Protecting Student Borrowers and Holding Student Loan Servicers

Accountable" September 10, 2019

Introduction

Chairwoman Waters, Ranking Member McHenry, and Members of the Committee on

Financial Services, thank you for inviting me to testify today regarding how to protect student

borrowers and hold student loan servicers accountable. I offer my testimony here on behalf of the

low-income clients of the National Consumer Law Center (NCLC).1

At NCLC, I direct the Student Loan Borrower Assistance Project. Our Project's policy

and advocacy efforts derive from our direct legal representation of low-income clients in

Massachusetts. These clients seek our assistance because they are struggling with student loan

debt. Through our client work, we see and hear the human toll of the tattered student loan safety

net. In addition to our work in Massachusetts, we consult with advocates across the country

1 The National Consumer Law Center (NCLC) is a nonprofit organization specializing in consumer issues on behalf of low-income people. Since 1969, we have worked with thousands of legal services, government, and private attorneys and their clients, as well as community groups and organizations that represent low-income and older individuals on consumer issues. NCLC's Student Loan Borrower Assistance Project provides information about student rights and responsibilities for borrowers and advocates, and provides direct legal representation to student loan borrowers. We work with other advocates across the country representing low-income clients. We also seek to increase public understanding of student lending issues and to identify policy solutions to promote access to education, lessen student debt burdens, and make loan repayment more manageable. See the Project's website at .

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representing borrowers--many with complaints against student loan servicers. Student loan borrowers are desperately in need of clear and enforceable consumer protection laws like those before the Committee today.

Draconian Consequences of Student Loan Default Currently, nearly 45 million people in the United States owe more than $1.5 trillion on their student loans. Roughly a quarter of federal loan borrowers are delinquent or in default.2 Vulnerable students who--like our clients--pursue education to better their lives and better provide for their families face severe consequences if they default on federal student loans. Loan servicers, which are lenders themselves or are hired by lenders, play a critical role in determining whether student loan borrowers succeed in repayment or experience default. In addition to communicating with borrowers about their loan repayment benefits and options, servicers are responsible for helping borrowers to access those options, processing payments, and assisting with problems. In this role, servicers wield substantial power over borrowers' financial stability. For example, when borrowers miss out on affordable repayment options or have payments misapplied, it can damage borrowers' credit histories, increasing the cost of access to further credit and potentially erecting barriers to accessing employment and housing. As the Consumer Financial Protection Bureau (CFPB) aptly explained in its 2015 report on student loan servicing, "the consequences of borrowers' failure to satisfy an obligation can be particularly injurious" for those borrowers who have limited credit history.3 Consequences can extend beyond traditional lending because "consumer credit profiles serve as a precondition to

2 See U.S. Dep't of Educ., Federal Student Aid, Data Center, Federal Student Loan Portfolio; see also, Consumer Fin. Prot. Bureau, Student Loan Servicing: Analysis of Public Input and Recommendations for Reform (Sept. 2015). 3 Consumer Fin. Prot. Bureau, Student Loan Servicing: Analysis of Public Input 140-141 (Sept. 2015).

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employment, housing, and access to credit, and consequently, servicing errors can have spillover effects on many other aspects of borrowers' lives and livelihoods."4

These devastating consequences of default are intensified for federal student loan

borrowers. The federal government has collection powers against defaulted student loan

borrowers that far exceed the collection powers of most unsecured creditors. Wielding these

coercive tools, the government often siphons thousands of dollars from borrowers already experiencing financial distress. The government can garnish a borrower's wages without a judgment, seize tax refunds (including the Earned Income Tax Credit),5 and seize portions of federal benefits such as Social Security.6 The amount the government seizes using these tools

often is far greater than what the same borrowers would have been required to pay under an

income-driven repayment (IDR) plan. These punitive collection activities often push low-income

households to or over the financial brink.

Racial disparities in default rates disproportionately expose borrowers of color to these

government offsets and other damaging debt collection practices. The impact of the Department's default collection tools extends beyond borrowers' immediate families and into

their surrounding communities. Research by the Washington Center for Equitable Growth found

that zip codes with higher shares of African Americans or Latinos, including many communities

that are already economically disadvantaged, show much higher delinquency rates on their student loans.7 The government's collection practices have the disastrous effect of systematically

4 Id. 5 See Appendix A; Persis Yu, NCLC, Voices of Despair: Student Borrowers Trapped in Poverty When Government Seizes Their Earned Income Tax Credit Report (Mar. 2018). 6 NCLC, Student Loan Law Ch. 9 (5th ed. 2015), updated at library. See also, Persis Yu, NCLC, Pushed into Poverty: How Student Loan Collections Threaten the Financial Security of Older Americans (May 2017). 7 Marshall Steinbaum and Kavya Vaghul, Washington Center for Equitable Growth, How the Student Debt Crisis Affects African Americans and Latinos (Feb. 17, 2016).

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stripping wealth from communities of color through the above-mentioned seizures of cash, as

well as the imposition of huge collection fees.

Even borrowers who avoid default and repay their debts can face additional charges if

they fall behind on their payments at any point. This can require further sacrifices to pay the monthly bills, dampening consumption and hindering the economy as a whole.8 Research by the

Federal Reserve Bank of New York suggests that burdensome student loan debt is causing borrowers to delay homeownership and live with their parents longer.9 For borrowers facing

financial hardship, competent and accurate servicing can be the difference between missing a

payment and staying on track.

Widespread Servicer Misconduct Threatens 45 Million Student Loan Borrowers

The scale of the federal student loan servicing industry and the impacts of its actions are

vast. Americans now owe more in student loan debt than they do for auto loans, credit cards, or any other non-mortgage debt.10 Federal data shows that almost a quarter of the nearly 45 million student loan borrowers are in distress on their loans.11

Unfortunately, the servicing system has become so confusing that an entire industry of

for-profit "debt relief" companies has sprung up to supposedly deliver what the free government

servicers are failing to provide. Borrowers run the risk not only of paying exorbitant fees to these companies, but also of losing important rights.12

Contrary to claims by servicers, U.S. Department of Education regulations on servicer

8 U.S. Dep't of Treasury, Press Center, Remarks of Deputy Secretary Raskin at the University of MarylandBaltimore County (Apr. 29, 2014), . 9 Zachary Bleemer, Meta Brown, Donghoon Lee, Katherine Strair, & Wilbert van der Klaauw, Echoes of Rising Tuition in Students' Borrowing, Educational Attainment, and Homeownership in Post-Recession America, Federal Reserve Bank of New York Staff Reports, no. 820 (July 2017). 10 See Fed. Reserve Bank of N.Y., Household Debt and Credit Report: Q1 2018 (May 2018). 11 See U.S. Dep't of Educ., Federal Student Aid, Data Center, Federal Student Loan Portfolio; see also, Consumer Fin. Prot. Bureau, Student Loan Servicing: Analysis of Public Input and Recommendations for Reform (Sept. 2015). 12 See Deanne Loonin and Jillian McLaughlin, NCLC, Searching for Relief: Desperate Borrowers and the Growing Student Loan `Debt Relief' Industry (June 2013).

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behavior are far from robust, and historically, its enforcement of borrower protections has been woefully insufficient. Upholding and improving federal consumer protection laws has never been more crucial. Record numbers of Americans struggle to afford their student loans, and many needlessly suffer long-term and irreparable harm from servicer misconduct, abuses, and deception. Servicers must be accountable for their actions and to the taxpayers who handsomely compensate them.

With the assistance of a competent and efficient servicer, financially distressed borrowers may avoid default by accessing flexible repayment plans, loan cancellation programs, or deferments or forbearances (which temporarily stop payments) that are appropriate for their circumstances. Unfortunately, as has been extensively documented, the student loan servicing industry has long been rife with misconduct. The four largest servicers of federal student loans have a documented history of "widespread servicing failures" that "create obstacles to repayment, raise costs, cause distress" and "driv[e] borrowers to default."13

In April 2017, the Consumer Financial Protection Bureau (CFPB) released a report detailing complaints filed by student loan borrowers working to repay their student loans. Specifically, borrowers and other stakeholders reported experiencing:

A wide range of sloppy, patchwork practices by servicers that create obstacles to repayment, raise costs, cause distress, and contribute to driving struggling borrowers to default.

Difficulty enrolling and staying in income-driven repayment plans including processing delays, inaccurate denials, lost paperwork, and insufficient information or guidance.

Confusion about their progress toward Public Service Loan Forgiveness programs. After

13 Consumer Fin. Prot. Bureau, CFPB Concerned About Widespread Servicing Failures Reported by Student Loan Borrowers (Sept. 29, 2015).

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years of making payments, some borrowers learn that their loans are not enrolled in a

qualifying repayment plan, even though they have told their servicers that they were pursuing Public Service Loan Forgiveness.14

As one private student loan borrower's complaint to the CFPB's Complaint Database

illustrates, borrowers experience challenges not only with ensuring the proper allocation of

payments, but also in attempting to resolve disputes:

Navient regularly and consistently fails to appropriately apply my student loan payments. I have XXXX loans ; XXXX are paid for by my cosigner, XXXX are paid for by me. I can't use their Autopay system ( which I 'm assured works better ) because they have previously withdrawn large sums of money without authorization. Instead we send payments with notes regarding which chunk of loans are to be paid with each payment. about every 6 months this system fails, and we have to start again explaining to many staff members how the money is to be applied. They typically tell me I have failed to make a payment ( even though I can see it on my account website ), they threat me with late fees and collections agencies... I have spoken repeatedly to their Consumer Advocate office to no avail....

In the federal loan context, servicing issues prevent borrowers from being able to access

many of the benefits offered by the Higher Education Act (HEA), which governs the federal

student loan program. IDR is the umbrella term for the various affordable loan repayment

options. IDR plans require borrowers to pay only a set percentage of their income toward their

student loan bills, and can require a small or even zero dollar monthly payment from the borrower.15 Remaining on an IDR plan provides the borrower with sustainable loan repayment

and a path to forgiveness of any remaining balance after twenty or twenty-five years of IDR payments.16

14 Consumer Fin. Prot. Bureau, CFPB Monthly Snapshot Spotlights Student Loan Complaints (Apr. 2017). 15 20 U.S.C. ?? 1087e(d)(1)(E) (applicable to Direct Loans), 1098e (FFEL). See 34 C.F.R. ?? 682.215 (FFEL), 685.221 (Direct Loan). 16 Id.

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This year marked the 25th anniversary of the first IDR plan: the Income-Contingent Repayment Plan (ICR). This means that student loan borrowers who entered ICR in 1994 should begin receiving loan forgiveness for completing 25 years of qualifying payments. Because of changes in IDR repayment options, borrowers originally enrolled in ICR who have not yet completed 25 years of payments can achieve forgiveness sooner or immediately by switching to the Revised Pay As You Earn (REPAYE) plan, which has a shorter repayment period for some borrowers. Despite the fact that forgiveness has been a potential option for some borrowers since REPAYE was implemented in late 2015, initial numbers indicate that fewer than 20 borrowers have utilized this option. This raises questions about whether borrowers are truly going to be able to access forgiveness under IDR. NCLC has submitted a Freedom of Information Act request to the Department of Education seeking data to determine the barriers keeping federal student loan borrowers from receiving the forgiveness to which they should otherwise be entitled.17

Despite the abundant benefits to the financial health of borrowers and their families, IDR programs remain consistently inaccessible for many borrowers, with documented low levels of participation by eligible borrowers.18 Problems with enrolling and renewing borrowers in IDR plans are particularly prevalent. Entering a borrower into an IDR plan is time-intensive and expensive for servicers, so servicers fail to invest resources in ensuring that borrowers understand and successfully access the most affordable and sustainable repayment plan. Instead, servicers steer many borrowers into forbearances and deferments, which are profitable for the servicer and costly to the borrower. Some servicers have misrepresented that borrowers have no other repayment options.

17 See Appendix B. 18 U.S. Gov't Accountability Office, Federal Student Loans: Education Could Do More to Help Ensure Borrowers are Aware of Repayment and Forgiveness Options, Report No. GAO-15-66 (Aug. 2015).

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An NCLC client had this experience as she struggled to afford her student loan payments

after completing a medical assistant program at a local for-profit school. Every year, she

dutifully contacted her servicer and submitted documentation of her financial hardship. Despite

clear eligibility for a zero dollar payment, she was never enrolled in an IDR plan. When this

borrower came to NCLC, she had never even heard of IDR options. Instead, each year when she

called her servicer to discuss her financial situation and options, she was directed into a number

of forbearances. She remained in good standing on her loan, due to her extreme diligence.

However, by steering her towards forbearance, the servicer's actions wasted years she could

have spent in an affordable repayment plan, working toward the eventual resolution of her loan.

Our client's experience is far from unique, and state enforcement actions targeted at this

type of misbehavior tell similar stories. Several state attorneys general (including those from

California, Illinois, Massachusetts, Pennsylvania, and Washington) and the CFPB have sued servicers for similar failures related to enrolling borrowers in IDR.19

In 2016, the U.S. Government Accountability Office (GAO) estimated that a borrower

owing $30,000 in federal loans who spent three years in a forbearance would pay $6,742 more

than a borrower on a 10-year standard repayment plan who did not spend any time in forbearance.20 The GAO further stated that encouraging "forbearance over other options that

may be more beneficial, such as [IDR] plans," will continue to place some borrowers "at risk of

19 See Consumer Fin. Prot. Bureau v. Navient Corp., 2017 WL 3380530 (M.D. Pa. Aug. 4, 2017); Press Release, Att'y Gen. of Cal., Attorney General Becerra Charges Navient Corporation, Largest Student Loan Servicer, with Deceitful Practices and Debt-Collection Misconduct in Lawsuit (June 28, 2018); Press Release, Att'y Gen. of Penn.,Attorney General Shapiro Sues Nation's Largest Student Loan Company for Widespread Abuses (Oct. 5, 2017); Press Release, Att'y Gen. of Il., Attorney General Madigan Sues Navient And Sallie Mae For Rampant Student Loan Abuses (Jan. 18, 2017); David Gutman, State AG Sues Student Loan Company, Alleging Unfair And Deceptive Practices, Seattle Times (Jan. 18, 2017); Press Release, Att'y Gen. of Mass., AG Healey Secures $2.4 Million, Significant Policy Reforms in Major Settlement with Student Loan Servicer (Nov. 22, 2016). 20 U.S. Gov't Accountability Office, Federal Student Loans: Education Could Improve Direct Loan Program Customer Service and Oversight: Highlights, Report No. GAO-16-523, 19 (May 16, 2016).

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